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The business case for behavioural economics

Category: Blog & News

One, two, three, four Nobel Prizes.

That’s the current count of the Nobel Prize in Economics being awarded to behavioural researchers after economist, academic, and author of Nudge and Misbehaving Richard Thaler was honoured for his contribution. It follows Herbert Simon (1978), Daniel Kahneman (2002) and Robert Shiller (2013)*.

Why is it a big deal? Behavioural economics is here to stay. It has been recognised as instrumental to our understanding of economics.

In other words, commerce.

In other words, business.

In other words, your business.

Which is why it was great to hear behavioural scientist Matt Wallaert advocating a new role within organisations - Chief Behavioural Officer (CBO).

A CBO would lead the identification, development and measurement of interventions to improve the effectiveness of what you are doing. They may look at:

  • how marketing can better influence customers,
  • how the procurement team negotiates more successfully with suppliers,
  • how finance gets people to pay attention to the right numbers, or
  • how HR and managers influence staff performance.

What do you think? Do you need a CBO? Or at least, the function of one?

Even if you are in a small business, I believe the function of a CBO is the biggest untapped opportunity available to you right now.

It costs very little but can improve every single touch point you have with people. Customers. Staff. Stakeholders. Suppliers.

Over the next couple of blogs I’ll be outlining how you may go about embedding behavioural economics (BE) in your business, starting with building a case for it.

Building a business case for BE

The first step to embedding behavioural techniques is getting decision-makers on board through a business case. In short, you need to convince them why you should do this.

Central to success is your ability to shake your stakeholders out of their status quo – the prevailing “business as usual” (a.k.a. not using BE). In my piece “how to get traction for your ideas” from a couple of years ago, I covered how to use positive tension to influence stakeholders by ensuring your presentation includes points that are salient, surprising and/or scary. Here's how we can use them for your business case.

Engaging your stakeholders

To get stakeholders interested in your BE business case your presentation needs to be:

  • Salient – messages cut through more with visuals and elements that are memorable. Bring in a stack of behavioural books to show how BE is seeping through leadership ranks, table case studies and articles of how others are applying BE (examples here), show results of any small trials you may have run in the lead up to this business case, and detail what your BE-embedded organisation would look like.
  • Surprising – what will make your stakeholder rethink their assumptions about how you do business? Point out any gaps you’ve noticed in how your business thinks people behave and how they actually do (The say vs. Do gap). For instance, did customers tell you they’d love a particular feature but it didn’t make any difference? Has customer satisfaction (a “say”) remained consistent but churn (a “do”) increased?
  • Scary – paint a picture about what your business has to lose if you don’t adopt BE. The “something to lose” strategy might include that your competitors are using it (especially likely in retail, finance and health industries) or how many customers your website is failing to convert. Your aim is to make your stakeholders feel anxious about keeping things the same so they will be interested in seeking a solution.

Convincing your stakeholders

Now that your stakeholders are interested, your other task is to convince them to proceed by making them feel comfortable with adopting BE.

  • Use analogies – to apply BE you are asking people to make a change. People cope better with change if it feels familiar, and to make a new thing feel familiar you can associate it with something they are used to. For example, if your organisation uses the Agile method, draw parallels such as BE being iterative (low risk experiments and constant improvement), inquisitive (looking for small, nimble opportunities) and collaborative (more minds, company wide endeavour).
  • Minimise perceived risk - reduce the real and/or perceived exposures to the business and to stakeholders if you adopt BE. Draw on what other businesses are doing to show how it can be done, propose small, contained trials so people can build their confidence, and get key senior influencers on board so that others feel less vulnerable.
  • Ensure reward is greater than effort – in order for anyone to bother adopting a change, the payoff needs to exceed effort. That means you have two sides of the equation to work through – maximising the reward for embedding BE while making it easy. Some thoughts to get you started:

Maximise Reward

Minimise Effort

  • WIIFM – Frame your pitch about what the benefit is to that stakeholder, not just the organisation. Appeal to their motivational bent which could include ego (“lead the way”), cost savings (“waste less resources”), performance (“greater conversion”) or development (“up skill”)
  • Proof points- Get people excited by showcasing results from real-life behavioural studies (e.g. people paid 2.8x more when an honesty box had a picture of eyeballs, sales increased 27% when a restaurant changed how it described ingredients, truancy decreased15% when a letter contained a social norm) 
  • ROI - Showcase the Return on Investment for your business. For example, the ROI on a small increase in web conversions through behavioural optimisation (More here)
  • Low cost- BE can be applied with little or no cost to existing processes, policies and procedures – it’s about tweaking what you currently do
  • Keep it simple –start with small initiatives and a small team using the most robust behavioural principles
  • Time – people are already busy, so demonstrate how BE can save time by clarifying behavioural objectives upfront, eliminating wasted resources
  • Decision – construct your case so the only valid decision – the easy decision – is to embed BE. Consider using a decoy option to make your preferred choice stand out, and remember to use design to advantage (like ticks and crosses to compare options and focussing on the middle option). Some further thoughts on how to avoid decision quicksand are here.

You’ve got buy-in. Now what?

Now that you’ve tackled the business rationale for behavioural economics and won your stakeholders over, your attention should turn to

  • how best to resource your BE function (e.g. centralise or democratise, in-house or outsource) and
  • how to actual embed it in your organisation (where to start and what to do).  
  • We’ll tackle these considerations in parts 2 and 3.

In the meantime, I’d recommend reading this Harvard Business Review article on “The Rise of Behavioural Economics and its influence on organisations” by Francesca Gino and listening to Matt Wallaert being interviewed in the new behavioural podcast Action Design Radio (1hr 17min)

* Hat tip to @Noahpinion for bringing this point about four Nobels to my attention

Special offer:

Get your FREE download of the 8 page "Embedding Behavioural Economics in your Business" PDF containing this article as well as Part 2. How to Resource your Behavioural Economics function and Part 3. Embedding BE.

This article was also published in Smartcompany.

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